Tax Rules To Know While Repaying Your Student Loan

Tax Rules To Know While Repaying Your Student Loan
  • Opening Intro -

    Student loans are surely a big help for those who want to pursue higher studies but paying them off can be a real pain.

    At the same time, clearing it off should be the first thing on your mind because it is a liability after all.

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To start with, you must have a repayment plan in place. You may opt for a standard repayment plan to clear the debt, while an income-based repayment program is another option.

Whichever way you want to do it, you must be aware of the tax implications of student loan repayments. This is because there are certain tax rules which can help or hurt student loan borrowers. Knowing both is a smart move so that you can take advantage of the favorable ones and steer clear of the unfavorable ones.

Here are the tax rules that you must know about while repaying your student loan.

Interest on student loans is tax-deductible

When you repay a student loan, you pay off the original balance along with the interest due on it. The good news is that you can claim a deduction for the interest you pay on these loans.

This is an above-the-line tax break which can be claimed on Form 1040 or Form 1040A irrespective of the fact whether you take the standard deduction or itemize your deductions. If you haven’t been regular with the repayment of your student loan, this is a good reason to be more consistent.

Not everyone is eligible for the tax break

Even though you may be keen to get a deduction, you need to understand that everyone is not eligible for it. If your modified adjusted gross income (MAGI) is below $85,000, you can claim the interest deduction on the repayment of a student loan in 2019.

However, these loans must have been used only for qualified education expenses. Loans borrowed for oneself or someone else’s (your child) education qualify for the deduction. Conversely, you cannot claim an interest deduction when filing with “married filing separately” status or listed as a dependent on another person’s return.

There are additional educational tax breaks as well

For students still in school or incurring education expenses, there are certain educational tax breaks they can claim. The government lets you claim some education tax deductions and credits as a part of the initiative to help students.

For example, you can avail of tuition fee deduction or claim a credit to cut down your tax burden. It is best to seek guidance from extremely knowledgeable tax attorneys to understand the tax breaks you can legitimately claim. This is a smart move for students who want to cut down their loan liability and simultaneously save up on taxes.

Understand the option of REPAYE

A new income-based repayment plan for student loan borrowers, Revised Pay As You Earn (REPAYE) is a good option to explore. This program limits the monthly payment for student loans to 10% of the borrower’s income so that you can manage to pay off without being burdened.

The rule applies to singles as well as married couples, though it could spell a major monthly expense for the latter. Further, it does not make a difference whether both spouses file jointly or separately at tax time. In both cases, the size of the monthly payment towards student loans depends on the combined income of both spouses.

Forgiven debt can be considered as taxable income

Obviously, being consistent with the monthly payment of your student loan will enable you to repay the entire amount subsequently. Also, there are chances that you may have you’re a part of your debt forgiven by the government at some point in time. But remember that forgiven debt is usually considered as taxable income.

other valuable tips:

The IRS deems this amount as a part of your income, which means that you will have to pay taxes on it. However, this rule may not apply to everyone. Borrowers exempted under special programs like the Public Service Loan Forgiveness Program and Teacher Loan Forgiveness Program, need not pay tax on the amount forgiven. Filing for bankruptcy is another case when your canceled debt will not be subject to taxation.

Being aware of all these tax rules can make you much smarter with the repayment of your student loan. With the right approach towards loans and taxes, you can easily get your student loan cleared up and save on taxes as well. So you must surely keep an eye on these tax laws and seek advice from experts when you need it.

Image Credit: repaying student loan by Pixabay

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Categories: Student Loans

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